How to Claim the Oregon R&D Tax Credit

Oregon has reintroduced a research and development tax credit for tax years beginning on or after January 1, 2024. This incentive, available through 2029, is designed to help businesses reinvest in their research activities by offsetting a portion of their tax liability.

This credit is specifically targeted at companies performing research within the semiconductor industry. The program provides a direct incentive for businesses to increase their investment in developing new technologies and improving existing processes within Oregon. This credit replaces a previous, more general R&D credit that expired at the end of 2017.

Determining Business Eligibility

To qualify for the Oregon R&D tax credit, a business must be classified as a “qualified semiconductor company.” The company’s primary business activities must involve the research, design, development, fabrication, assembly, testing, or validation of semiconductors. The definition also includes companies creating semiconductor manufacturing equipment or developing core intellectual property or software for the industry.

The research activities must be physically conducted within Oregon. The credit is available to businesses subject to Oregon’s corporate excise or personal income taxes, allowing it to be claimed by both corporations and pass-through entities.

A mandatory step for eligibility is the annual certification process with the Oregon Business Development Department (Business Oregon). Companies must apply to be certified as a qualified semiconductor company. This application requires a fee and a description of how the company meets the statutory definition and its research supports a business directly related to semiconductors. The application is due by October 15 of the tax year for which the credit is being claimed.

Identifying Qualified Research Expenses

Oregon’s definition of qualified research aligns with the federal definition in Internal Revenue Code Section 41. This means that activities must satisfy a four-part test to be considered qualified.

• The research must be for a permitted purpose, meaning it intends to create a new or improved business component in terms of function, performance, reliability, or quality.
• The research must be technological in nature, relying on principles of engineering, computer science, or physical or biological sciences.
• The activities must be designed to eliminate uncertainty about the capability or method for developing or improving a product or process.
• The work must involve a process of experimentation, which can include modeling, simulation, or systematic trial and error to evaluate alternatives.

Qualified Research Expenses (QREs) fall into two main categories. In-house research expenses include wages paid to employees for performing qualified services and the cost of supplies used during the research process. Contract research expenses are costs for third parties performing qualified research on the company’s behalf, provided the business retains substantial rights to the research results and bears the financial risk of the project.

Calculating the Credit Amount

The credit is 15% of the amount by which the current year’s Qualified Research Expenses (QREs) exceed a calculated “base amount.” The maximum credit a taxpayer can claim in one year is $4 million.

The base amount is calculated by multiplying a “fixed-base percentage” by the average annual gross receipts of the business for the four preceding tax years. The base amount cannot be less than 50% of the current year’s QREs. This floor prevents the credit from becoming excessively large for companies with rapidly growing revenues but historically low research spending.

The fixed-base percentage is the ratio of aggregate QREs to aggregate gross receipts for a specific historical period, typically the 1984-1988 period for established companies. For businesses that started after that period, a different set of rules applies for establishing this percentage.

For example, if a company had $2 million in average annual gross receipts and a 10% fixed-base percentage, its base amount would be $200,000. If its current year QREs were $500,000, the credit would be 15% of the $300,000 difference, resulting in a $45,000 tax credit.

Required Documentation and Claim Process

Businesses must maintain records that substantiate their research activities and associated costs. This includes project plans, test results, payroll records, and invoices for supplies and contract research. This information is not filed with the return but must be available in case of an audit.

The claim is made on Oregon Form OR-RDC, where the taxpayer formally calculates the credit. After completing Form OR-RDC, it must be attached to the company’s annual Oregon tax return, such as Form OR-20 for C corporations or the relevant return for pass-through entities.

A feature of this credit is its partial refundability for companies with fewer than 3,000 Oregon employees. The refundable portion is 75% for companies with fewer than 150 employees, 50% for those with 150 to 499 employees, and 25% for those with 500 to 2,999 employees.

Any portion of the credit not used to offset tax liability and not refunded can be carried forward against future tax liabilities. These unused credits expire when the program concludes, as the credit is only available for tax years beginning before January 1, 2030.